As the Federal Reserve Board raises short-term interest rates over the next 15 months, the yield curve will flatten and the rate on the 30-year fixed-rate mortgage will rise to 6.6% by year-end and hover around 6.8% in 2005, according to a survey of economists by The Bond Market Association.The rise in interest rates "will not make housing unaffordable," said Richard Berner, chief economist for Morgan Stanley & Co. In fact the June survey shows that the economists expect 2004 will be another record year for home sales -- but by a very slim margin. (The survey was taken before the May existing- and new-home sales numbers came out, which established new monthly records.) While the respondents believe inflation will remain moderate, they are wary that an uptick could force the Fed to raise rates more aggressively. "There is some upside risk that shouldn't be overlooked," said Michael Decker, TBMA's senior vice president for research and policy. "Inflation could pick up if the economy grows faster than expected or labor costs increase."
